Wednesday, January 23, 2008

The Derivatives Explosion Continues...

Derivatives Explosion In Interest Rate Trades...

Developments in the OTC derivatives market since 2004

Positions in the OTC derivatives market increased at a rapid pace during the last
three years. Notional amounts outstanding of such instruments totalled $516 trillion at the end of June 2007, 135% higher than the level recorded in the 2004 survey (Table A). This corresponds to an annualised compounded rate of growth of 33%, which is higher than the roughly 20% average annual rate of increase since positions in OTC
derivatives were first surveyed by the BIS in 1995.3 Notional amounts outstanding
provide useful information on the structure of the OTC derivatives market but should
not be interpreted as a measure of the riskiness of these positions. While a single
comprehensive measure of risk does not exist, a useful concept is the cost of
replacing all open contracts at the prevailing market prices. This measure, called
gross market value, increased by 74% during the reporting period, to $11 trillion at
the end of June (Graph 1, left-hand panel). Counterparty risk is further reduced by
bilateral netting and collateral arrangements. While comprehensive data on the
collateral held against positions in OTC derivatives are not available,4 the semiannual survey does ask reporting dealers to state their gross credit exposures...

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